Why Lowest Price Isn't Always the Best Strategy for Contracts

By Rosita Johnson

When entering or bidding on a contract, organizations often prioritize price as the strategy and the key deciding factor. However, focusing solely on cost can overlook critical elements that determine a project's overall success and long-term value. Increasingly, both public and private sectors are recognizing that technical expertise, quality, and past performance often deliver more value than simply opting for the lowest bid. Recent trends reflect a growing shift toward prioritizing these attributes over price. At ASCI, we have also observed this shift, with more solicitations from federal government and commercial clients emphasizing quality over cost in their decision-making processes.

The Risks of Focusing Solely on Price

Contracts awarded solely on price often encounter a range of issues. When contractors undercut prices, they may be forced to cut corners in order to stay within the budget. This can lead to poor-quality work or extended timelines. Recent studies highlight the dangers of contractors undercutting prices, which often leads to poor-quality work, extended timelines, and increased long-term costs. When contractors submit unrealistically low bids, they may be forced to cut corners to stay within budget, resulting in the use of cheaper materials and compromised safety standards. A 2020 report by the Builders Association noted that undercutting often leads to the use of substandard materials or inadequate labor, which can jeopardize project integrity and safety.

Additionally, examples from government contracts illustrate the dangers of prioritizing price over quality. In one instance, a water service contract in Atlanta had to be terminated early after the contractor cut more than half the workforce, leading to severe violations of federal drinking water standards​. These cases show that underbidding can lead to substantial additional costs for rework, delays, and safety violations in both public and private sectors.

The Impact of Low-Cost Contracts on High Turnover Rates

Contracts awarded based primarily on low-cost bids often experience another significant issue: high employee turnover rates. When companies operate on tight budgets, one of the first areas affected is workforce management. Low wages, limited benefits, and overburdened staff are common in contracts that prioritize cost over value, leading to dissatisfaction and higher turnover rates.

A 2021 study by the National Employment Law Project found that sectors with a high prevalence of low-cost contracts, such as security services and facility management, had annual turnover rates exceeding 40%. This constant churn creates instability, disrupts project continuity, and ultimately lowers the quality of service delivery. Workers who feel undervalued or underpaid are less likely to stay, impacting the employer’s ability to maintain a skilled and experienced workforce.

Additionally, research from the Center for American Progress shows that replacing an employee costs businesses about 20% of that employee’s annual salary due to hiring, onboarding, and training costs. When contracts are awarded based solely on price, contractors may be unable to offer competitive wages and benefits, driving skilled workers to seek employment elsewhere. This frequent turnover not only increases costs but also leads to delays and errors, as new workers need time to adapt to the demands of the project​.

The Hidden Long-Term Costs of Low Bids

While bidding low to win contracts may seem advantageous at first glance, the long-term consequences often negate any short-term savings. Studies have shown that projects awarded on the lowest bid frequently incur additional expenses due to rework, delays, and overall inefficiencies, ultimately costing more than initially anticipated. According to a McKinsey study, projects awarded on the lowest bid can experience cost increases of 20-30% due to factors like design changes, inadequate initial planning, and poor risk management.

Furthermore, Dusty Robotics emphasizes that rework alone can significantly inflate project costs. In the construction industry, where rework is common, poor collaboration and misaligned expectations between stakeholders lead to costly delays. Skanska, one of the world's largest construction companies, reported that rework accounted for up to 75% of their cost overruns. This highlights how small errors, miscommunication, or design flaws early in the project can spiral into significant financial burdens as contractors scramble to meet deadlines or fix mistakes that should have been addressed in the planning stage.

These findings are not limited to the construction industry. Across sectors, projects initially won with low bids often face rising expenses due to unforeseen complications. Inefficient project management and a lack of resources typically tied to cost-saving measures result in higher operational costs, wasted time, and lowered overall productivity.

The Growing Importance of Experience and Capability

Organizations are increasingly prioritizing experience and specialized knowledge over cost savings when selecting contractors. The Chartered Institute of Procurement & Supply (CIPS) emphasizes that factors such as value for money, quality, and reliability should take precedence over cost alone in supplier selection. Value for money isn’t simply about finding the cheapest option but ensuring a balance between cost and the quality of services. Contractors with certifications like ISO 9001 (quality management), ISO 45001 (health and safety), and ISO 14001 (environmental management) bring higher operational efficiency, better safety standards, and stronger sustainability practices. These factors may come with higher initial costs, but they yield long-term benefits like fewer errors, improved safety, and greater customer satisfaction.

In industries like supply chain management, logistics, and warehouse operations, certified providers ensure streamlined processes, reduce workplace accidents, and adhere to both environmental and safety regulations, minimizing costly disruptions. By choosing suppliers that prioritize reliability and quality, companies avoid the risks and expenses associated with rework or service delays often linked to cheaper options. This focus on expertise and capability results in better overall performance, making it far more beneficial to invest in quality over cost savings alone.

A Shift Across Multiple Industries

In many sectors, decision-makers are moving toward a more balanced approach that weighs cost alongside other critical factors. In recent years, government contracting has increasingly shifted its focus from simply selecting the lowest-cost provider to prioritizing experience, capabilities, and the ability to deliver complex services. For instance, federal agencies are now placing greater emphasis on factors such as technical proficiency, sustainability initiatives, and past performance over cost. According to Bloomberg Government, spending on Best-in-Class (BIC) contracts has surged as these contracts emphasize consistent pricing strategies and the delivery of high-value, quality services, rather than just low-cost solutions. From FY 2021 to FY 2022 alone, government contract spending rose by around $50 billion, driven by R&D, IT, and infrastructure projects, reflecting this ongoing trend towards valuing capabilities over cost.

Moreover, firms with certifications that demonstrate superior standards, such as ISO 9001 (quality management), ISO 45001 (occupational health and safety), and ISO 14001 (environmental management), are increasingly favored in government contracts. These certifications show a contractor's ability to maintain high operational standards, reduce risks, and ensure compliance with stringent regulatory requirements. For example, a recent ISO survey showed a 392% increase in ISO 45001 certifications between 2019 and 2020, highlighting the growing importance of health and safety in procurement decisions. Similarly, ISO 14001 certifications grew by 11.5% in the same period, reflecting the prioritization of environmental management by governments looking to meet sustainability goals.

Government contracts are increasingly valuing these certifications because they provide assurance that contractors can consistently meet high standards in service delivery while managing environmental impact and ensuring workplace safety. This trend is especially significant in sectors like IT, supply chain management, and infrastructure development, where adherence to ISO standards has become a competitive advantage for firms seeking government contracts. These certifications not only help contractors comply with regulatory expectations but also improve their chances of winning bids by demonstrating a commitment to quality and sustainability.

Conclusion

As organizations continue to recognize the shortcomings of price-focused procurement, a shift toward prioritizing technical capabilities, experience, and certifications is becoming increasingly prominent. While low bids may offer initial savings, the long-term costs associated with poor quality, rework, and turnover often outweigh those savings. By investing in contractors with a proven track record of quality and sustainability, organizations can ensure better project outcomes and reduce the risks of delays, errors, and increased costs. Prioritizing quality over price isn’t just a best practice—it’s a strategic move that leads to better value and greater success in the long run.

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